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Synovus Financial (NYSE:SNV)

Q3 2011 Earnings Call

October 27, 2011 8:00 am ET

Executives

Thomas J. Prescott - Chief Financial Officer and Executive Vice President

Kevin J. Howard - Chief Credit Officer and Executive Vice President

Patrick A. Reynolds - Director of Investor Relations

Roy Dallis Copeland - Chief Banking Officer and Executive Vice President

Kessel D. Stelling - Chief Executive Officer, President, Director and Chairman of Executive Committee

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Operator

Good morning, ladies and gentlemen and welcome to Synovus' Third Quarter 2011 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Pat Reynolds, with Investor Relations. Sir, the floor is yours.

Patrick A. Reynolds

Thank you, Kate, and thank all of you for joining us today on our call. During this call, we will be referencing the slides and the press release that are available within the Investor Relations section of our website at synovus.com. Our presenters today will be Kessel Stelling, President and Chief Executive Officer; Tommy Prescott, Chief Financial Officer; and Kevin Howard, Chief Credit Officer.

Before we begin, I need to remind you that our comments may include forward-looking statements. These statements are subject to risk and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. Further, we do not intend to update any forward-looking statements to reflect circumstances or events that occur after the date these statements are made. We disclaim any responsibility to do so.

During the call, we will discuss non-GAAP financial measures in reference to the company's performance. You can find a reconciliation of these measures to GAAP financial measures in the appendix of the presentation. Finally, Synovus is not responsible for and does not edit or guarantee the accuracy of earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. With respect to time available this morning and the desire to answer everyone's questions, we ask you to initially limit your time to 2 questions. If we have more time available after everyone's initial 2 questions, we will reopen the queue for follow-up questions. And now I'll turn it over to Kessel.

Kessel D. Stelling

Thank you, Pat, and thanks to all of you who are listening in this morning. You have seen our release by now and the headline that we did report a profit for the third quarter of 2011. And as I said in the release, we are pleased to return to profitability, it's a key milestone for all of our stakeholders certainly for our employees, for our customers and for our shareholders. Many of whom are listening on the call today, so let me jump right in to the deck on Page 4 and start with our financial results summary.

As you can see, net income available to common shareholders was $15.7 million compared to a net loss of $53.5 million in the second quarter of 2011 and a loss of $195.8 million in the third quarter of 2010. Our net income per diluted common share of $0.02 compares to a net loss of $0.07 in the second quarter of 2011 and a net loss of $0.25 in the third quarter of 2010. We're pleased that our pretax pre-credit cost income was up $2.5 million to $119.4 million. That's up $2.5 million from the second quarter of 2011. Our total credit costs were $142.5 million, down $15.4 million or almost 10% from the second quarter of 2011, and down $158.4 million or 52.6% in the third quarter of 2010. Kevin Howard will talk in-depth about that later.

Our earnings did include net securities gains of approximately $63 million. Tommy Prescott will discuss the investment portfolio repositioning later in this presentation and take any questions on that.

A big part of our story and a big part of our recovery continues to be that our credit metrics continue to improve. So let me lift out some slides that Kevin will follow later and just talk a little bit about them.

We're on Page 5. Credit cost declined for the ninth consecutive quarter and as you see down 9.8% from the second quarter and again almost 53% from the third quarter. Our charge-offs were $138.3 million or 2.72% compared to $167.2 million, 3.22% in second quarter, and $237.2 million or 4.12% in the third quarter of 2010. As you recall, Kevin had guided in the 3% to 3.5%, and we're pleased to see that number come in at 2.72%. Our distressed asset sales totaled $168.6 million in the third quarter, slightly higher than we had guided, but pleased to continue to work down our levels of distressed assets.

If you'll continue on Page 6. Again, on our credit metrics, our NPL inflows totaled $222 million. As many of you will recall, who were on the call last quarter, we have seen significant decline in the second quarter from $306.5 million in the first to $231.1 million in the second and had guided that we expected inflows for the third quarter to be somewhat stable or flat compared to the third quarter. We were actually pleased to see the slight decline at $222 million and expect that to further decline in the fourth quarter and again, Kevin will talk about that as well.

Our total NPAs ended the quarter at $1.16 billion, a $54.3 million decrease from the second quarter and a $392 million decrease from the third quarter of 2010. We're also pleased to report that our potential problem commercial loans declined 21.4% from the second quarter of 2011, down 49% from the peak in the third quarter of 2010 and also pleased to report that special mention loans declined 10.2% from the second quarter of 2011.

Let me take you through a few highlights on our balance sheet. On the loan side, total loans ended the quarter at $20.1 billion. That represents a decline of approximately $400 million from the second quarter, driven primarily by a $353 million decline in CRE loans. Our loan mix continues to improve. Our combined C&I and retail portfolios now represent 63% of our total loans. Our CRE portfolio represents 37% of total loans. That's down from 41% in the third quarter of 2010 and down from a peak of 45%.

We are still experiencing, as are our competitors, sluggishness in this economy and certainly, loan demand is soft. I do want to share with you just a couple of improving growth indicators that give us confidence that we will stabilize our balance sheet and return to a position of growth in the not-too-distant future. We achieved reported growth in owner-occupied real estate and small business loans, both of those reflecting the targeted sales effort of our bankers. Our new loan fundings were up approximately $130 million or 22% from the second quarter, and we continue to be encouraged by our loan pipeline, both in new areas that we previously talked about and throughout our footprint. That pipeline continues to increase monthly, especially on the C&I side.

The deposit story is certainly a good one. The overall performance of the deposit portfolio was strong. Our core deposits increased $767.4 million or 15.1% annualized from the second quarter of 2011. We had growth in the total number of accounts. And particularly pleased to see that our number of noninterest-bearing accounts, the net number grew by 3,123 accounts or 3.6% annualized from the second quarter, again, I think a reflection of our customer-based and community-based focus throughout our footprint. The mix continues to improve, broker deposits declined as planned, about a $533 million decrease in brokered deposits.

On the expense management side, on Slide 8, we do remain on track to generate the $75 million of projected expense savings in 2011 and the $100 million in 2012, and on track to eliminate 850 positions in 2011. When we announced the 850 positions, that was not a net number, that was just 850 positions. You'll see now that our headcount net has decreased 824 since December of 2010 and that includes some of the very strong strategic investments in new talent. So we're very pleased with how we continue to manage the headcount of this company. You will see in the chart core expenses for the first 9 months of 2011 are down $67 million or 11% versus the same period of 2010. And on that expense front, I just want to reassure everyone that we continue to pursue expense saving opportunities, not satisfied with just what we've already announced. We are pursuing opportunities across our footprint, including branch rationalization both the number, the size, the efficiency of our branch structure, the procurement function, the facilities function, which includes managing our corporate real estate and a number of other initiatives that we think will generate additional savings to the expense line. And we'll talk more about that later if you have questions.

I'd now I'd like to turn it over Tommy, who will give you a more in-depth look at our financial results.

Thomas J. Prescott

Thank you, Kessel, and I'm going to take you to Slide 10, which illustrates the trends of the third quarter against the second quarter that Kessel just talked about. And this really an income statement that's driven by the positive results and pretax pre-credit cost income, continued improvement in reduction of credit cost and also included, as Kessel mentioned, the $62.9 million in securities gains. I want to point out to you a couple of things on this slide. The share count bumped up significantly from the third quarter and that's related to the tMEDS, which are now counted in the EPS equation because we recorded profitability for the quarter. Also want to mention the tax line that you'll see a tax benefit that occurred in the second quarter and a tax expense, similar amounts that occurred in the third quarter and those are both related to the securities portfolio. In the second quarter, we had that benefit from the unrealized gain increase that occurred during that quarter. In the third quarter, we realized some of those gains and the primary component of that tax expense is a reversal of what occurred in the second.

Slide 11 illustrates the loan trends that Kessel was describing. We ended the quarter at $20.1 billion in the loan portfolio. We saw the continued moderation of loan balance declines with a big driver of the decline being the continued reduction of commercial real estate loans. That was $353 million of the decline as a key driver.

Slide 12 illustrates the deposit trends that, as Kessel mentioned, a very strong quarter in deposits, $767 million of core deposit growth, 15.1% annualized over the previous quarter. Noninterest-bearing deposits led the way with $1 billion increase over a year ago, $372 million for the quarter, up 30% linked quarter, now at 25% of the core deposit mix. We continue to move away from the wholesale funding, primarily brokered CDs and also moving away from core time deposits to lower cost core deposits. During the quarter, we shrunk the broker portfolio $533 million and total deposits ended the quarter at $23.1 billion, increasing $234 million on a linked quarter basis.

Slide 13 addresses the margin, also shows the trend in net interest income with a slight reduction in each. The margin was down 4 basis points. That was a product of a 9-basis-point decline in earning asset yields, driven by repricing both securities and the maturing loans here in the quarter. The repositioning of the portfolio was all done fairly late had a probably about a 1 basis point impact on the margin in the quarter. So that was not a key driver in the quarter. The earning asset decline was partially offset by a 5 basis point decline in effective cost of funding, largely from downward pricing in maturing core deposits -- core time deposits.

Expenses are illustrated on Slide 14. Kessel described the trends and really shows I guess very graphically what the year-to-date numbers, the magnitude of the expense take down we've had. This illustrates the quarters and you can see the step down from the fourth quarter of last year and the continued downward movement in expenses. I'll point out that the employment expense is up slightly from the quarter really had to do mostly with 2 more pay days here in the quarter and also was impacted by the higher level of variable compensation that's tied to production incentives, mortgage rates and that type of thing, which are a -- all have a revenue side to them also. Pretax pre-credit cost income at $119.4 million for the quarter, up $2.5 million. And that was a product of a little bit of shrinkage in net interest income that more than offset in noninterest income and in core expenses.

Slide 16 illustrates the investment portfolio and you can see on the slide the shift of the mix of the portfolio and also growth in the portfolio. Really, the market conditions in the quarter presented the opportunity to reposition the portfolio and in doing so to fast-forward capital and to lock in capital and also to gain a little better control and a lower prepayment risk. You'll also see that we added to the portfolio with the tremendous deposit increases we've had and our desire to continue to bring the balance of the bid down as we did in the quarter, about $350 million, which we did add to the portfolio also during the quarter.

The capital picture is illustrated on Slide 17 and what this slide really shows is -- that the growth in all the regulatory ratios, the tangible common equity ratio did not enjoy that growth as the underlying security gains were already included in that. And so that ratio did not uptick like all the regulatory ratios, but all in all, capital ended the third quarter in good standing and with good direction.

I'm going to stop there and turn it over to Kevin Howard, our Chief Credit Officer.

Kevin J. Howard

Thank you, Tommy. If you'll go to Slide 19, I'll review our credit trends for the third quarter starting with credit cost. Our total credit costs were down 10%, with our provision expense down 15% compared to last quarter. The 2 primary drivers of the provision improvement were lower mark-to-market expenses as we get further into that portfolio, the marks seem to be a little bit less and also the new stuff that's coming in has defaulted, don't quite contain the loss that comes in and so we've had some improvement there, continuing improvement and we expect to see that going forward. Also, we had improvement in our overall migration cost, those were the 2 primary drivers there. Our ORE expense component of credit cost was up $3 million to $41 million, about 75% of the ORE expense is comprised of dispositions and mark-to-market costs with the rest of the expenses related to handling ORE such as maintenance, foreclosure expense, legal, et cetera. While we remain cautious given this, given the uncertain economic climate, we do anticipate our total credit cost to continue its declining trend at a more significant pace next quarter led by accrued disposition results based on slightly less volume, which typically leads to better realization rates. We also expect continued improvement in migration trends and mark-to-market expense results due to the existing markdowns that are already on our troubled assets, which is displayed in the appendix, which is marked down 44%.

Charge-offs were down 17% or $39 million from last quarter. Again, the improvement here was primarily attributed to lower mark-to-market costs as well as improvement, pretty significant improvement in our C&I losses and had improvement as well on our retail portfolio charge-offs. Our charge-off guidance for the fourth quarter is that we will be below 2.5% and we expect to see continued improvement through 2012. Based on that improvement, I have mentioned already -- based on some of the things I've mentioned already as well as the confidence going into 2012 that we have a much better positioned balance sheet and we really assume little, if any, economic lift. Our loan loss reserve decreased 12 basis points to 2.96%. This decrease was due to a number of factors, primarily loans sold with reserves attached and improved migration demonstrated by, as Kessel mentioned, the lower potential problem loan and special mention balances. I will mention our cash rated credits did increase during the quarter, those obviously carry lower reserve requirements.

As shown on the bottom right-hand chart, our past dues continue to trend just below 1% for the quarter.

Slide 20 reflects an overall view of our nonperforming asset trends in the third quarter. Our total NPAs were down $55 million during the quarter to 5.71%, and our nonperforming loans were down $13 million to 4.34%. This was the sixth consecutive quarter of declines in NPAs, now down 37% from the peak and first quarter of 2010 and down 26% year-over-year. Our third quarter nonperforming inflows, as Kessel mentioned, were $222 million, a $9 million decrease. The bottom right graph on the slide shows the mix of the new inflows and as you can see, our inflows in investment real estate continued at lower levels and we had improvement again in our residential and land related inflows. We also, we do expect to see improvement next quarter with continued improvement into 2012 in our inflows. This is based on the significant progress we've made in reducing our potential problem loans and special mention balances and our exposure in the land and residential portfolios, which we will review later in this presentation.

Slide 24 -- excuse me, Slide 21 -- shows our continued efforts in disposing our problem assets. We sold $169 million this quarter, a little higher than we guided and we achieved $0.37 on unpaid balance. The makeup of the dispositions this quarter was $52 million of ORE, $77 million nonperforming loans and about $40 million were performing loans. The mix sold by asset type was about 35% was land acquisition and residential related, 49% investment CRE, 12% C&I and about 4% was retail. I do want to comment on our disposition strategy, which is always subject to change due to market conditions, but going into the fourth quarter and on into 2012, we will target sales of about $100 million to $150 million in dispositions a quarter. This range was really chosen based on our confidence that our migration within the portfolio will continue to improve. And given, as I mentioned, given a lower targeted disposition volume, our expectation for better reallocation rates, which also supports our expectation of improvement and our disposition costs going forward.

Slide 22 displays the potential problem commercial loans, which we define as commercial substandard accruing loans, excluding 90-day past dues and TDRs, which are reported separately. Our potential problem loans were down close to 22% or $257 million this past quarter, and were down 50% from just a year ago. I do want us to point out only $30 million of this $257 million decline is attributed to loans moving to TDR status. With the remainder of the decrease reflecting fundamental improvement in our potential problem loans. And it should be noted as Kessel mentioned, special mention loans, which are reflected in another chart in the appendix, were down 10% from last quarter and down over $400 million since March 31.

Slide 23 takes a look at our TDRs and their mix. Our accruing TDRs increased by $88 million or about 16% from last quarter. While not accruing TDRs increased by $30 million. This increased primarily due to the market rate component of the new TDR guidance. However, the impact of provision expense and loan loss reserve was minimal. I do want to point out that 31% are in the residential and land-related portfolios and also that 39% of our accruing TDRs are in our pass or special mention grades. Additionally, over 94% of the accruing TDRs are paid current.

I want to take a quick view of the portfolio, starting on Slide 24, an overview of our investment real estate. As shown earlier, the NPL inflows were $32 million and if you exclude our smallest commercial development portion of that portfolio, which is land related, it's less than $300 million. But if you excluded that, just based on our income producing properties, the NPL inflows this quarter would have been just $15 million and our NPL ratio would have been less than 1.5%. The charge-off ratio did increase this quarter, mainly due to we sold a higher portion of -- managed the dispositions in the assets related to investment real estate. Past dues continue to remain at low levels, 0.51 of 1%. And lastly, I want do to point out as well the -- we recently finished our quarterly review of loans greater than $1 million. It represents about 83% of that portfolio, loans that are above $1 million and to date it reflected continued stabilization of the debt service coverage ratios and fewer loans with debt service coverages less than 1:1 so fundamental, fundamentally, we're stabilizing and even improving in the investment real estate.

Slide 25 takes a look at our residential C&D and land portfolios. While these 3 categories once made up 22% of our portfolio, they now comprise only 7%, 7.5% of our loans, but still represent close to half our NPLs. Our progress in dealing with these portfolios is demonstrated by the fact that now only 28% of our substandard loans are in these categories, and 11% of our special mention loans are in these categories. So this gives us greater confidence that this weaker segment of our balance sheet will have much less impact on credit costs going forward. Past dues are just slightly over 1% at 1.09% in these portfolios.

Slide 26 reflects our C&I portfolio, which has remained stable from last quarter. As we stated in the past, this is a well-diversified portfolio by industry as demonstrated on this slide. Net charge-offs were only significantly down, 0.67 of 1% in the quarter and past dues at 1.06%.

Our last slide in the credit presentation is our retail portfolio. Good trends here as well. This was the third consecutive quarter of declining NPL inflows and the lowest quarter of inflows since the third quarter 2009. Charge-offs declined for the seventh consecutive quarter to 1.64%. Again, this portfolio is a credit scored almost exclusively in market lending, and we thought this portfolio has performed relatively well during this entire credit cycle.

That concludes my comments. So I'll turn it back over to our CEO, Kessel Stelling.

Kessel D. Stelling

Thank you, Kevin and Tommy for your presentations. Before we turn to the Q&A, I want to address just a few other points that I'm sure are on your mind and certainly on ours. The first would be our view on profitability in the fourth quarter and beyond. As we mentioned in the release, our goal is clearly long-term, sustained profitability and growth. We do believe that we'll be profitable in the fourth quarter and specifically that our pretax pre-credit cost income, excluding any securities gains we may realize will exceed our total credit cost for the quarter. You can do that math yourselves, but we do expect credit costs that will require a further decline there and we do expect that, that will happen.

As to the DTA, I'm going to refer you to Page 29 of the deck or it's actually the first slide in your appendix and has further detail. But just in summary, we do expect to reverse most of the DTA valuation allowance once we've demonstrated a sustainable return to profitability, perhaps at the point where we'd significantly improved credit quality and experienced consecutive profitable quarters, coupled with a forecast of sufficient continuing profitability. As we've stated before, the reversal of that allowance is subject to considerable judgment, and we believe that it could be a 2012 event.

Finally, on TARP. Again as we've said before, repayment of TARP is not necessarily linked to our DTA recovery, but the events that allow for one are similar to the events that allow for another specifically, sustainable core profitability, improvement in our credit profile and the forecast of sufficient continuing profitability. Therefore, the timing could be similar or linked, but it does not necessarily have to follow the DTA recovery. As it relates to TARP, we want to do what's prudent for our company, certainly for our shareholders and in consultation with our regulators and as we have the ability to be more specific on timing there, we certainly will.

At this time, operator, I'll turn it over to you to open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today is coming from Steven Alexopoulos.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

JPMorgan. Maybe I'll start my first question, the increase in TDRs related to the new FASB guidance seemed to be much greater than what we're seeing out of other banks. Most other banks are saying this is a nonmaterial event for them. Could you guys give more color on why the TDRs went up so much related to the new provision?

Kevin J. Howard

I'll just say, first of all, for the guidance that was implemented in the third quarter, we would have a had slight reduction in TDRs this quarter, but almost all of the increase was to look back into loans we renewed in the first half of the year as the new guidance called for, where the rate was not modified to a market rate, so to say, and the new guidance now requires us to go back and identify it. So we really, it was more the look back of looking at those rates and it was more market rate related, not restructure related.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Got you. And then just for a second question. That's helpful. The inflows into nonperformer have come down a lot, right? $220 million but it's still a big number. Can you talk about why is it so high given that you are seeing special mention come down and did you expect that to trend down more materially in coming quarters?

Kessel D. Stelling

We do, Steve. And let me start there and I'll let Kevin touch on that. We do expect that to trend down materially in coming quarters. As you all know, we had and still by certain measures have a higher concentration of commercial real estate loans. We mentioned we've brought it down from 45% to peak to 41%, now to 37%, but those legacy assets still have to flow through the cycle. And so we had again guided in the third quarter numbers similar to the second quarter. We were pleased. We do expect that to come down. I think Kevin mentioned $175 million to maybe $200 million, if he didn't, that's our expectation but it does come down significantly. There's no magic formula as to when it goes to nonperforming and we work with customers where we can and as they default or as they don't meet our test for performing status, we continue to move them that way. I'll add that they were as, I think we could have said for the last several quarters, very few surprises in that portfolio. The resources we've dedicated both on the credit side and the investment real estate side I think allow us to stay ahead of the curve as it relates migration and in general, no real surprises for the quarter.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Is that a fourth quarter target, the $175 million to $200 million or is that just the range you're trying to drive down to?

Kessel D. Stelling

That would be a range that we expect. The numbers are what they are. But that's what we expect based on our existing credit profile, our deep dive into our substandard accruing credits and special mention credits. Kevin, with his regional credit officers and regional CEOs and with D Copeland and all the bankers, take almost weekly looks at all of those problems and again, I would say for the last several quarters at least, we've had a high degree of accuracy in our ability to predict the defaults.

Operator

Our next question today is coming from Ken Zerbe.

Ken A. Zerbe - Morgan Stanley, Research Division

Morgan Stanley. From what I can tell, it looks like a lot of the reason why you posted a profit this quarter is because of the large security gain you took in the quarter. Can you just tell us how much more work do you have to do before you're done with your portfolio repositioning?

Thomas J. Prescott

Sure Ken, I'll take it. This is Tommy. I'll take a shot at that. The third quarter was really the main event Howard described. That's to reposition the portfolio is something we do ongoing. The unique opportunity that was presented in the third quarter caused us to take a pretty good bite in and I mentioned some of the benefits of it of fast-forwarding capital and to reposition the portfolio. We saw the market reaction after the FOMC [ph] announcement be a pretty extreme reaction and so we just couldn't turn that down but I'd say that we never rule it out in any quarter, including the fourth quarter, but consider the third quarter the main event and we'll just go from there.

Ken A. Zerbe - Morgan Stanley, Research Division

Okay. And then I think I heard on the call that you said it happened late in the quarter. So it only had a 1 basis point negative impact on NIM. When we look to fourth quarter, what's your estimate for sort of a run rate impact just due to the repositioning you did this quarter?

Thomas J. Prescott

The portfolio repositioning was done really in the last 2 months of the quarter but a lot of the settlement occurred very late so it wasn't a big impact around the third quarter. We would estimate that the impact of the repositioning would be about 8 basis points on the margin there in the fourth quarter. We also believe that we've got a good bit of room in the core funding side to continue to push that down and to push out some of the higher-priced CDs and decline the broker balances some more, and we think that that'll largely offset the 8 basis points.

Ken A. Zerbe - Morgan Stanley, Research Division

Oh, gosh, so 8 basis points versus 1, so a 7-basis-point delta Q-on-Q?

Thomas J. Prescott

Yes.

Operator

Our next question today is coming from John Pancari.

John G. Pancari - Evercore Partners Inc., Research Division

Evercore Partners. In terms of the cost saves. Can you talk to us about how much in the targeted cost saves you achieved this quarter and how much is in the run rate and then if you could talk a little bit more about the pace of the cost saves that you expect to realize over the next couple of quarters?

Thomas J. Prescott

We've targeted the $75 million lift out that would be accomplished this year, the impact on this year and we feel like actually, we're going to exceed that number some. If you kind of do the math and you assume a similar maybe slightly lower G&A trend in the fourth quarter, which we believe will happen, then you actually get closer to $100 million difference over 2010. There's a lot of moving parts there because all the while we're doing this, we are strategically lifting out cost in the company, but we're also adding things where appropriate, in risk areas and in front line areas or specialty areas. So you got to think of both sides on it, but we think that we're largely there on the installation of the programs we'll seize a little bit of an incremental continued benefit in the fourth quarter and then we made the point earlier and I'll make it again that in this environment, I guess expense management is the new way of life in banking, certainly in our company, and we have to respond to the size of the balance sheet. So we'll keep looking hard and keep pushing on every front strategically and tactically.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. And when you said that you're ahead, does that mean we just -- when it comes to the pace of the realization. Where do you expect that you could up the size of the amount of cost saves ultimately that you can receive through 2012?

Thomas J. Prescott

We're going to stick with the previous guidance. As you think about just the restructuring, but all the while we've been doing what you do as you're trying to find more efficiency and in addition to some of the cost saves that come from the strategic plan, we actually are just continuing to make doing common sense things to push expense down in every category. So we stand behind the $100 million reduction from the restructuring standpoint and a good bit of that is being realized in 2011. But you'll continue to see a downward trend in the G&A core trend line as you get into 2012.

Operator

Our next question today is coming from Craig Siegenthaler.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Crédit Suisse. And I don't think you said this specifically in the last response, but of the $75 million that you plan for calendar year 2011, how much was in the run rate for September 30. So as of the end of the third quarter, and how much for June 30, so as of the end of the second quarter?

Thomas J. Prescott

We haven't disclosed it that precisely but the $75 million was really what we said is if we see that benefit that would occur in 2011, by the end of the year that we would have installed all the programs that would get you the $100 million total benefit on a go-forward basis. So we feel like we're on track for that plan and again, I mentioned there are a lot of moving parts with some tactical reductions that occurred along with the strategic and also some add backs, so I think the best way to describe that it is if you look at the run rate in the third quarter this year and we see it continuing to move down in the fourth quarter and then it will continue to bump down some in the 2012 quarters.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. And then just a follow-up question on middle-market and commercial banking, probably where your loan growth rates the highest out of -- relatively out of all your portfolios? And I don't if D Copeland's on the line to help out here, but how does the pipeline of new activity in this book compare to the level of credit that's actually rolling off and then also, how do the yields compare. So the yields of the business you're putting on, versus the yields of the business from about 5 years back that's rolling of?

Kessel D. Stelling

Yes, Craig, a couple of things, I would say, one, I'll address maybe the pipeline piece that is there. We've had good growth in the pipeline in C&I second quarter from third quarter over second quarter. If you look at it in the C&I category, it would be also our strongest pipeline on a go-forward basis as well. If you go in and look at it from a rate standpoint, I'll maybe say versus the previous quarter, we would be just in C&I portfolio really would be stable. There hasn't been a big change in our new and renewed rates in C&I. If you go over a 5-year period, you know, I think that's going to get property or customer specific, depending on what you're doing there. The fixed rates are of course, that we do will be lower but on a variable rate, there were some pretty aggressive rates 5 years ago and I would say we've not got back to those levels at this point.

Operator

Our next question today is coming from Jefferson Harralson.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Good to hear that the originations, the loan originations are picking up. I was trying to kind of gather when loan growth might turn around and turn positive. I was thinking the best way to ask that would be to ask you the size of what you think the run-off book is and the amount of shrinkage you're getting from that each quarter.

Kessel D. Stelling

I don't know that we have disclosed that when we would say we would expect the balance sheet to turn. I think we would all say it's a 2012 event because as you go in with the portfolio, as Kevin stated earlier, your past [ph] portfolio has continued -- grew this past quarter. We will still be working through some of the challenged assets in the portfolio. So one of the reasons we are tracking and looking at the overall core growth that you see has a positive continuing trend is so that you can get a feel for new business versus working through the legacy problem and challenged assets that are out there. I will say in addition to that, the positive signs that we do have is significant growth in new fundings in third quarter over the second quarter, as well as a growing pipeline of third quarter over fourth quarter, which should lead to improved results in that in the fourth quarter as well.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

All right. Now as I follow-up on the liquidity question, and how much excess liquidity do you have now? How did that change quarter-to-quarter and what's on the positive effect?

Thomas J. Prescott

We ended the quarter with about a $2.6 billion at the Fed balance, that's down $350 million or so during the quarter. We had the tremendous surge of core deposits coming in, but we also ran off a lot of broker deposits and we're able to invest some additional dollars in the investment portfolio. So we continue to push the Fed balance down and we'll continue that path and trying to do it wisely and in the most productive way and look for us to continue to push that down.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And just real quickly, how much is left in that TD product, the aggregated TD product that was, I think, driving some of that liquidity that you said.

Thomas J. Prescott

Couple of $100 million left in the Shared Deposit Program, which it was literally 10x that size awhile back and it's now consists of CDs that are maturing and the bulk of those will be gone by the end of this year with a little bit of spillover into 2012. So it's really not a key player in deposit base or liquidity now.

Operator

Our next question today is coming from Kevin Fitzsimmons.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Kessel, something you said earlier in your comments about reversing the DTA, you noted how you need to show improved or sustained profitability, but also improved credit and quality. And with that, I'm just trying to reconcile that with Kevin's commentary about the disposition strategy. So specifically, why would we be slowing down disposition activity instead of ramping it up? Especially with this -- we've had this big spike in TDRs, granted its more of an accounting true up, but a lot of us and a lot of investors because we don't know what to do with that bucket, we end up sliding it into nonperforming. So your nonperforming bucket just optically looks bigger right now and if you're looking to really make up for that and to move things out more quickly and assuming OREO is marked accurately, why wouldn't we be ramping up the speed of disposing of those assets as opposed to, it seems like deliberately slowing it down?

Kessel D. Stelling

Yes, Kevin, let me try and hit several of those points. And first on the TDRs, they were up 16% but I'll make the point that Kevin made again, 94% actually a little more than 94% of those loans are current. Another way of looking at those are the fixed problem loans and so and I can't speak to how others did it again, ours were up 16%, but that was not a material change for us, and we don't view that portfolio really any differently today than we did last quarter. As Kevin said, it's sometimes hard to determine a market rate for a substandard credit so when you take that look at it, some go into that bucket that are performing today and always have performed. So -- and I'll just again highlight the potential problem loans came down, special mention came down. So if you look at the overall profile, again we feel that credit will improve. Now getting back specifically to DTA, we're talk about profitability and improving credit. They both have -- improving credit has to happen to get to the profitability. We believe the migration trends slow down, and we again don't disclose a lot of it, we saw a lot of positive migration in some of our special mention categories this quarter where those loans went from special mention back to a 5-rated loan status, again we don't disclose the details. So overall, we see improvement in all buckets and that will just allow us to slow down slightly the disposition activity. But as we've always done and always said, we don't lock ourselves into any number in any given quarter. If the market conditions are right and the bids are healthy, you may see something, something north of that, but we think that's a good target for our company, for our bankers, we still sell a lot at the local level and also allows for our bankers to spend a little more time playing offense as well.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

So have you seen any material change in the activity or the marks out there or is it more simply a case of going bulk versus the strategy of just doing individual sales in terms of the latter being better for you all?

Roy Dallis Copeland

Yes, Kevin, that probably would be the main driver is. If we operate in that $100 million to $150 million range that Kevin had talked about, it allows us to do to carry a lot of those sales at the local level, which have better returns, when you push past that, you end up with more bulk sales, which actually hurts you on a return standpoint. And so that's one of the main reasons that we get there. It has a -- there are different economics on the 2 sales.

Operator

And our next question today is coming from Nancy Bush.

Nancy A. Bush - NAB Research, LLC, Research Division

NAB Research. Two questions for you, on the loan growth side, can you just flush out for us what is coming from new customers and what is coming from existing customers and are you moving market share?

Roy Dallis Copeland

And I would end up saying new customers versus existing customers. I probably can answer that more anecdotal. I would say on the new funding side that we have, it would be acquisition of newer customers. Now I will say they are coming from competing institutions. We are not seeing a lot of new loan growth in the market. This is basically those growth and those new fundings are actually coming from competitive, competitive, really competitive situations and then the second piece of the question?

Nancy A. Bush - NAB Research, LLC, Research Division

Yes, does that mean you're moving market share?

Kessel D. Stelling

Nancy, and this is what D was referring to. We are in certain segments. Certainly, our new large corporate banking initiative is paying dividends for us, the Senior Housing Group, the large corporate, the syndications, that's moving market share. We also had growth in the small business again as D said -- that's anecdotal in terms of where that came from but I think across the footprint, if you look at new customer acquisition on the deposit side, which we can track a little better in terms of new customers, it would spill over to loan size. So certainly, on the large corporate, we think that's coming from taking market share and probably a mix of that in the small business as well.

Nancy A. Bush - NAB Research, LLC, Research Division

And just secondly, Kessel, if I could ask you, you spoke about branch rationalization as being a part of the expense control equation. Does that mean that you would think about leaving markets? Does that fall into the branch rationalization category?

Kessel D. Stelling

Again, I wouldn't rule anything out. I don't want to get off on that tangent, but I understand your point. It could. I mean, we announced earlier -- last year 39 branch closures and that exercise was very healthy for our company and caused us to take a deeper look. As you know well because you've followed us for so long, our company was built on acquisitions and so not just the number of branches but they're probably 30 or 40 headquarters buildings out there as well. So when I speak of rationalization, I think we could get by with fewer branches. I think we could get by with smaller branches. We could combine some and hopefully build new. So it's a mix of all that. Would we exit markets? I would never rule it out. We're pleased with the performance in our -- all of our markets right now. But as I've said before, if we don't over time gain traction in certain markets then longer term, I think our company has always been a market leader and I think that gives us pricing and other competitive advantages on both the loan and deposit side, and we're still top 5 market share in most of the markets in which we operate.

Operator

Our next question today is coming from Kevin St. Pierre.

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

Sanford Bernstein. Kessel, just you mentioned on your outlook for the fourth quarter that we can do our math. I just want to make sure that we're starting from the same point. So where pretax pre-credit costs being above total credit cost. So that would be the $119.4 million on pretax pre-credit cost this quarter and the $142.5 million on total credit cost. Correct?

Kessel D. Stelling

That's correct.

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

Okay, great. Next, and second, on headcount, on the headcount reduction, given the headcount reduction, I would have expected by now to see a bit more of a decline in the employment expenses, which have been kind of flat for the past 3 quarters. Is there some severance in there or if we look at employment expense per headcount, it's actually up since the end of last year.

Thomas J. Prescott

Kevin, the severance is outside of that category, but keep in mind that we have, while we're doing the lift outs and we're on target and actually ahead of the strategic reductions, we have added some back in some specialty areas that I mentioned. Also in particularly, in the third quarter, I mentioned the 2 extra days, which has a cost that goes with the 2 extra pay days. And also I guess on the positive side of that expense increase, we have some incentive-based and production-based pay, like the mortgage area and so forth that has a revenue to offset to it that shows up in another line. I think if you look back at the early slide, in Kessel's presentation where we show the year-over-year reduction, you can more dramatically see the results of the work that's been done in 2011 on reducing expenses.

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

Okay, great. And then finally, Tommy, on the -- you mentioned the tax rate or the taxes this quarter mainly a reversal on the securities sales. Am I correct in saying that as we move forward, you would expect little to no tax expense as you report profitability?

Thomas J. Prescott

Yes, that's what we believe, that's correct.

Operator

Our next question today is coming from Mike Turner.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Compass Point. Just want to ask 2 follow-ups related to earlier questions. What, in general, were kind of your average origination yields in the quarter? I know you've got a lot of different products in there, but just maybe if you could ballpark that, that would be helpful.

Kessel D. Stelling

Yes, if your average -- you're talking about from a rate standpoint?

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Yes, just gross origination yields, the loans you put on the books in the third quarter.

Kessel D. Stelling

Yes, it's just south of 5%.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay, great. And then also, just on the TDRs of the $88 million, the accruing TDRs of the $88 million increase, can you talk about what predominantly product drove that. I mean, was it CRE, was it residential, was it across-the-board? And then also, maybe it will be helpful if you could give an example that might, of that type of loan and walk us through that, that would be really helpful.

Kevin J. Howard

Yes, we took a look at that -- it's pretty much -- it's divided, almost even with C&I, investment real estate, and still a little residential, but you can see the makeup of the overall TDR, is only 30-so-percent of those residential and land, so a lot of it is -- just an example would be loan we could have, again the increase was the look back and we could have renewed a loan back in March or say and it was renewed at the existing rate and at the time, the guidance was not necessarily identified as a TDR and to look back into that example now was in the recast, you needed to identify that as a TDR. So we went back and identified those, but they were mainly, we didn't move the rate up high enough or we were just working with a customer and gave a what would be considered a below market rate for the risk on a credit of that type.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

And are you taking any charge-off for this or are you just keeping a below market rate because they -- cash flow is tight?

Kevin J. Howard

Again, most of the TDRs, as you can see, and something I want to point out, 40% I think of those TDRs are either pass or special mentions. The ones that are pass on there, I'll tell you, those are off primarily A-B notes, where we did take charge-offs on those. Those are going to be the ones that pretty much we took the charge-offs on and we charged off to BPs and it lined up with our policy and the cash-rated credit at that point and we identified, you still have to keep it, even though it's cash-rated credit and the TDR status until the end of the year and then those will roll off. So that matches up with about the number of A-B notes we've done during the year.

Operator

Our next question today is coming from Jennifer Demba.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

SunTrust Robinson Humphrey. I think most of the questions have been asked, but I did have a question for you, Tommy, specifically on the margin outlook for the next few quarters. I know you repositioned the securities book. I'm assuming though you're still expecting compression.

Thomas J. Prescott

Jennifer, we believe that right now I'd call it stable with maybe a slight amount of more downside risk than upside. We believe that there's room on the funding side to keep pushing down. We took some steps in the third quarter that really hadn't been reflected yet. Just like some of the bond yield changes hadn't been reflected, but we think the 2 will -- one will hurt us, one will help us and then net-net we can stay basically stable with just the possibility of a little bit of downside risk in there.

Operator

Our final question today is coming from Brian Foran.

Brian Foran - Nomura Securities Co. Ltd., Research Division

It's the last 2 I had. Can you just go over again when we model Tier 1 common from here, how the recapture from a DTA perspective works? I'd thought it was just earnings times 1.1 to reflect kind of the bigger base of Tier 1 common to compare the DTA against, but then, I wasn't sure how the look forward works.

Thomas J. Prescott

In order to get the benefit of the DTA into Tier 1 common, unlike getting it into the TCE ratio, which would be immediate. First of all, you have to get it back for GAAP purposes and that's a separate event from getting it back then for regulatory purposes. The DTA, the regulatory limits, you can't have more than 10% of your Tier 1 common be supported by DTA or you can't, there's certain limits on forward earnings. So it takes a while to amortize the DTA back in the regulatory ratio. It's really -- it's likely a matter of years for that to happen, but you do, day one, get probably a small benefit in the regulatory ratios and then as earnings progresses and you cover with pretax income of a sufficient amount to cover the DTA to amortize the DTA into those ratios. So I hope that answers your question.

Brian Foran - Nomura Securities Co. Ltd., Research Division

I mean, I guess I'm still confused by, if your Tier 1 common goes up by $10 next quarter, now you have an extra $10 of base to compare the DTA against. So wouldn't you just automatically be able to bring in $1 of DTA for every $10 you earn? Or are you saying there's some other, I guess I'm not clear what the separate restriction is other than 10% of your Tier 1 common?

Thomas J. Prescott

You have to pass, just whichever test gets you first. In this case, set aside the one you're using because the other test that you have to pass first is, you have to have sufficient projections, sustainable projection of pretax income for a 1-year period and you can bring that amount of DTA in. In other words, if you're going to make $200 million in the next 365 days, you can bring in $30-odd-million of the DTA during that period. So 1-year look forward where you have to cover with pretax income, an appropriate amount to take bites out of the DTA. So it takes more than a year or 2 to get there, but it becomes meaningful pretty quick.

Operator

That was our final question for today.

Kessel D. Stelling

Well, thank you very much and let me just close just very briefly by thanking all of you listening on the call today to the analysts, other members of the investment community that follow and support our company. I want to also thank the team members who are listening in, the Synovus team members who just work so tirelessly throughout the cycle in support of our company and in support of our customers and especially to our customers and shareholders listening in as well. I just want to personally thank you all for your continued support. I look forward to bringing all of you further updates about the continuing progress in our company and I hope you all have a great day. Thank you very much.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

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